Restructuring of State-Owned Firms and Workers: Evidence from East Germany

Moritz Hennicke


Daylight - Nightlight

Decarbonization and the Role of the State

  • Subsidies and grants
    • US Inflation Reduction Act
  • State equity and ownership
    • Nationalization of EDF in France 2022: "abundant production of carbon-free electricity" (Euractiv 2022)
    • European Innovation Council R&D Funding
    • China: SAIC Motor EVs

Can we learn from past state-led industrial transformations?

  • Fall of Berlin Wall brought End of Fully State-Owned East German Economy
  • Adoption of West German model $\rightarrow$ Probably most radical reorganization of industrial production and ownership in recent history

Preview of Results

  • RQ: How does the restructuring of state-owned enterprises impact workers?
  • Data: Close to universe of East German state-owned enterprises and survey of workers
  1. Event study: Local labor market impact Privatizations and Liquidations by government agency on worker outcomes
    • Both treatments affect workers negatively: Employment, income, life satisfaction
  2. Event study: Impact of Privatization on firm outcomes
    • Privatization leads to decline in employment and revenue
    • Decomposition (Ongoing): Survival and exit after privatization
  • Conceptual explanation: Timid private capital
  • Welfare (Ongoing): Can we set boundary of state by comparing net costs of state-ownership to income losses?


  • State-Ownership
    • Privatization: Arnold (2019) on Brazil & Olsson and Tag (2021) on Sweden: Wage and employment decreases for affected workers
    • → Potential consumption gains for affected workers? East Germany: Drop in life satisfaction
  • Democratization
    • Giuliano et al (2013): Increases reforms, Acemoglu et al (2019): Spurs growth through social policy and capital accumulation, Dorsch and Mareek (2019): Brings Inequality to middle ground
    • → Clean test of mechanism: Reorganization of production
  • German Reunification
    • Abadie et al (2014): Reunification led to drop in output, Bachmann et al (2014): East-West Convergence stopped, Akcigit et al (2023): Employment guarantees led to productivity growth and exit, Findeisen et al (2021): Sharp wage growth due to reallocation across plants within East Germany
    • → First study on effects of restructuring of Communist SOEs on workers


  • Peaceful revolution and fall of wall in 1989
  • End of autocratic regime and centrally planned economy
  • Reunification: Which firms are competitive? Who should own state-owned firms?
  • Privatization agency "Treuhand" staffed with West German business elite
  • Accompanied by large protests, RAF terrorists murder director
  • Privatization results after 4 years: Firms
    • privatized (54%)
    • liquidated (25%)
    • restituted (13%)
    • state-owned (2%)

Source: Hennicke, Lubczyk and Mergele (2021)

  • Annual expenditures over GDP: 0.48% (Great recession bailouts 2007-2010) < 1.34% (Treuhand 1990-1994) < 9.6% (Covid-19 2020-2022)

Privatization Process

  • Privatization vs. Liquidation decision was informed by ranking of external expert body (Hennicke, Lubczyk and Mergele, 2021)
  • Most productive firms were sold to West German corporations (Hennicke, Lubczyk and Mergele, 2021)
  • Firm bidding processes were not very competitive (ongoing work)
  • Tight employment guarantees in privatization contracts led to employment growth, but higher exits (Akcigit et al 2022)

Source: Hennicke, Lubczyk and Mergele (2021)

Timeline and Treatment Intensity

Construction of Workers' Sample

Data and Sample Selection

  • State-owned enterprises
    1. Internal administrative data used by privatization agency Treuhand (ISUD)
      • Capital, location, subsidies
    2. Biannual SOESTRA surveys of (former) Treuhand firms (Mergele, Hennicke and Lubczyk 2021)
      • Timing of privatization decision, sector, employment, revenue, location
    3. → Main sample with firms with non-missing employment, district and sector is close to universe
  • Workers
    1. Representative individual and household panel (GSOEP): 1990-2000
      • Outcomes: Employment, income, wage, life satisfaction, self-reported health, public transfers
      • Characteristics: Binary gender, education, age, location, 2d industry
    2. → Working-age individuals that lived in East Germany before 1989

East German SOEs weighted by Initial Employment Over Time

Income, Unemployment and Life Satistfaction during the Transition

LP-DID: Difference-in-Differences with Local Projections (Dube et al, 2022)

  • Advantages: Multiple continuous treatments, computation time, transparency
  • Aggregate worker outcomes at year (t) - local labor market level (j) (defined by district and 2-digits industry) and weigh by initial market size
  • Two staggered absorbing treatments: Log initial employment-weighted # of privatizations and liquidations
  • Estimate for every event study coefficient $h$
  • \[ \underbrace{y_{j,t+h} - y_{j,t-1}}_{\text{Long difference}} = \underbrace{\beta^h_{LP-DID} \Delta Privatizations_{jt}}_{\text{First-differenced treatment}} + \underbrace{\tau^h_t}_{\text{Time FE}} + \epsilon^h_{jt} \]
  • Restricting observations to either
    • newly treated: $\Delta Privatizations_{jt} > 0$ but $\Delta Liquidations_{jt} = 0$
    • or "clean control": $Privatizations_{j,t+h} = 0$ & $Liquidations_{j,t+h} = 0$
  • Analogously for liquidations
  • Identification assumptions: Parallel trends, no anticipation
  • Limitation: General equilibrium spillovers

Privatizations and Liquidations Decrease Labor Force Participation

Privatizations and Liquidations Decrease Household Income

Privatizations Decrease Life Satisfaction

Privatizations and Liquidations Increase Unemployment

Privatizations and Liquidations Decrease Wages

Privatizations and Liquidations Decrease Self-Reported Health

Privatizations Increase Public Transfers

Liquidations Increase Propensity to Move to West Germany

Privatizations and Liquidations Increase Propensity to Move to Services Sector

College-Educated More Likely to Leave Work Force

Women and Men Drop Out of Labor Force

Old and Young Workers Are More Likely to Stop Working


  • [Balanced] panel on local labor markets
  • Selected treatment group: Only [stayers] in local labor markets
  • Selected treatment group: Only [movers] across districts and industries
  • [Matching] on pre-treatment observables: 1d industry, binary gender, age, college

DiD: Privatization Impact on Firms

  • Exits: 32% of privatized firms do not survive first 5 years (Mergele, Hennicke and Lubczyk 2022)
  • Data: Balanced panel from 1991-1997
  • Estimate for every event study coefficient $h$ with annual firm ($j$) panel
  • \[ \underbrace{y_{j,t+h} - y_{j,t-1}}_{\text{Long difference}} = \underbrace{\beta^h_{LP-DID} \Delta Privatization_{jt}}_{\text{1st-diff. treatment indicator}} + \underbrace{\gamma^h \Delta y_{j,t-1}}_{\text{1st-diff. outcome lag}} + \underbrace{\tau^h_t}_{\text{Time FE}} + \epsilon^h_{jt} \]
  • Control group: Not-yet treated and firms remaining state-owned (abstract from changes in federal, state or city ownership)
  • Matched on state, 1 digit industry, privatization agency division
  • Robustness: Public utility industries, Firms in municipalities that filed recommunalization requests
  • Identification assumptions: Parallel trends
  • Limitations: General equilibrium spillovers

The Impact of Privatization on Firms

The Impact of Privatization on Firms: Additional Outcomes

Conceptual Framework

  • Bargaining: Workers with private or state-owned enterprise following Arnold (2019)
  • Introduce shocks to profits as argued by Demougin & Sinn (1994)
  • Assuming normally distributed shocks to labor input and CARA
  • \[ \max_{L_j, K_j, w_j} \underbrace{(L_j w_j + (\bar{L}_j - L_j)v - \bar{L}_j v)^{\gamma_j}}_{workers} \\ \underbrace{(\lambda_j (F_j(K_j, L_j) + \tau_j L_j - r K_j - w_j L_j - \lambda_j \frac{\sigma^2}{2} L_j ))^{1-\gamma_j}}_{firm} \]
  • Privatization might lead to downsizing due to
    • Higher per worker subsidies $\tau_j$ to state-owned enterprises
    • Superior risk-sharing possibilities of state $\lambda_j$

Marginal Value of Public Funds

  • Hendren and Sprung-Keyser (2020)'s MVPF for a 1% reduction of (employment-weighted) privatizations (from average level)
  • \[ MVPF = \frac{WTP}{\text{Net Costs to Government}} \]
  • Willingness to pay by workers
    1. Avoided monthly household income loss
    2. \[ -\beta_{LP-DID}^6 * \bar{inc} * 12 * 6 \]
  • Net cost to the government
    1. Decrease in annual public transfers (UB, social assistance etc)
    2. \[-\beta_{LP-DID}^6 * \bar{transf} * 6 \]
    3. Direct subsidies to SOEs:
      \[ -\frac{\text{All subsidies to SOEs 1990-1994}} {\text{Sum of annual employment in SOEs 1990-1994}} * 6 * \Delta (-\bar{ewP}) \]
    4. No privatization revenue, tax revenue etc

Marginal Value of Public Funds of Continued State-Ownership

\[ MVPF = \frac{WTP}{\text{Net Costs to Government}} = \frac{1223}{44715} = 0.027 \]


  • Can East Germany's transition inform current efforts to decarbonize industry?
  • Reunification likely led to dip in GDP (Abadie, Diamond, Hainmueller 2015)
  • Germany's East still lags behind its West
    • Close to 1/2 of East German workers would have benefited from slower phase-out of state-ownership
    • At what costs?
Source: Abadie, Diamond, Hainmueller (2015)

Hardship during Transition

Source: Milanovic B., Income, Inequality and Poverty during the Transition from Planned to Market Economy (1998)

Employment and Dimensions of Life Satisfaction in East Germany

Source: Based on retrospective questions in SOEP (2017)

The Impact of Privatization on Firms: Public Utilities